Smoking decreases health costs to society

The academic literature generally concludes that smoking reduces health costs to society. This is in stark contrast to commonly held beliefs that there are substantial health care costs borne by society from 'vices' such as smoking, alcohol consumption and fatty foods (which are the target of future regulations).

In fact I will argue (slightly tongue in cheek) that as a society we would be better off if more people would take health risks, and it would be a simple solution to the aged care burden many fear will occur when the baby boomers retire.

The following academic results are typical (my emphasis).

Health care costs for smokers at a given age are as much as 40 percent higher than those for nonsmokers, but in a population in which no one smoked the costs would be 7 percent higher among men and 4 percent higher among women than the costs in the current mixed population of smokers and nonsmokers. If all smokers quit, health care costs would be lower at first, but after 15 years they would become higher than at present. In the long term, complete smoking cessation would produce a net increase in health care costs, but it could still be seen as economically favorable under reasonable assumptions of discount rate and evaluation period.

And from here

Until age 56, annual health expenditure was highest for obese people. At older ages, smokers incurred higher costs. Because of differences in life expectancy, however, lifetime health expenditure was highest among healthy-living people and lowest for smokers. Obese individuals held an intermediate position.

As I have said repeatedly

My core argument in this field has been that increasing preventative health care, while having the benefits of a healthier and long life, often come at increased total lifetime health costs, rather than decreased costs as is often proposed. Remember, we all die some day, and any potential cause of death postponed will allow another to take its place, which of course has its own health costs. Alternatively, a more healthy existence may make us more productive for longer and lead to us contributing more in taxes over our lifetime than the potential increase in health costs which were paid through the tax system for our preventative care.

I argue that most unhealthy vices provide a net benefit to society in terms - they reduce health costs by more than the reduction in tax contributions to health care which may occur due to illness.

The reason is simple. Most of the serious health problems associated with drinking, smoking and obesity take a long time to present. A smoker whose habit had no impact on their lifetime employment, but dies as a result of lung cancer upon retirement at age 65, has still contributed all their lifetime productive efforts to society, including plenty of transfers to others via taxes on tobacco itself, but avoided ongoing health costs from ageing, and costs of the pension.

It sounds cruel, but it is true. The rest of us are better off if people die soon after they retire (unfortunately they are not). The costs of these health vices are therefore borne directly by the people who partake in them, to the benefit of those who choose not to. Perhaps an alcohol and tobacco subsidy is in order?

The only situation where relatively healthy people are worse off from the poor habits of others is if the illness resulting from some unhealthy habit or behaviour occurs early in life and is a barrier to employment and social contribution in general.  In this case the 'unhealthy choice' would result in a massive reduction in their own well-being AND incur costs on others.

The academic literature seems to suggest that this situation is relatively uncommon compared to the alternative, where apparently unhealthy habits do not radically decrease people's productive contributions during their working like.

We can see then that the aged care burden we face is a result of people living healthier and longer lives, especially in the period after retirement. This is mostly the results of better nutrition, lack of war, and importantly, far greater medical knowledge and technology. Unhealthy consumption habits, like smoking, actually have a net effect of reducing the health care burden to society.

As a final note, the amazing gap between academic understanding, public perception, and political ramblings, suggest that taxes on tobacco and alcohol are more about raising revenue than reducing society wide health care costs. The counterintuitive and technical nature these academic conclusions make them easy to keep isolated from policy discussions, allowing politicians to keep any debate at the most superficial level.

*I am not a smoker, but am an occasional drinker, and generally want to live a long time, so I selfishly choose to stay as healthy as I can.

Myth: Tight rental market boosts home prices

A common housing market myth is that low vacancy rates lead to rent increases, which lead to price increases (or at the very least, put a limit on any loss in home values). For example -

...this market imbalance will at some points cause an acceleration in rentals growth and a tightening in rental vacancies, so setting the stage for a recovery in prices through 2012.

Unfortunately, if history is anything to go by, this argument fails in real world conditions.

The two graphs below make the point clearly. In the early 1990s, vacancy rates soared and prices remained flat. But in the early 2000s, rental vacancies matched these highs during the strongest period of price growth observed in 25 years. How can these two opposing relationships been reconciled?

(Images from here and here)

I have a hypothesis.  During boom times overbuilding results in a slight glut in homes entering the rental market (eg 2000-2005). As the construction boom subsides, these homes are slowly absorbed by rental demand. When the market begins to fall (bringing much of the economy with it) potential sellers become reluctant landlords, boosting rental supply (eg 1990-1995). Additionally, nervous householders reign in spending on housing, resulting in an increased occupancy rate and lower rental demand.

There are many ways the occupancy rate increases, which don’t necessarily imply a shortage of homes. Downsizing leads to more efficient use of existing homes -

For example, the parents of a family whose adult children have moved out with friends or partners might find that the upkeep of a large house conflicts with their ‘grey nomad’ retirement plans. They can sell their 5-bedroom house and move into a new 2-bedroom unit, pocketing the price difference for their retirement.

In this scenario the construction of a 2-bedroom apartment resulted in a 5-bedroom home being available to meet the housing needs of population growth.

Other ways include university students moving home with their parents, and grandparents moving in with their children’s families.

If my hypothesis holds, then the ‘rental market cycle’ has two periods for each economic cycle, and tight markets are a signal of a price boom only if the previous trough was prior to a price fall. Therefore our next 'rental market cycle' will be one accompanied by falling prices, or flat at best.  The evidence in Brisbane seems to suggest that this pattern is beginning to occur (although prices have already fallen 10%).

(I also have a suspicion that auction results show a similar cycle - increasing in booms and busts, with low clearance rates at turning points.)

Interesting TEDx video on risk taking and helmets

...and a light read on safety measures that don't work (but probably make us feel better).

Helmet laws hit the headlines - again

The public debate about mandatory helmet wearing laws in Australia has raged since Sue Abbott won an appeal to the District Court last August defending her failure to wear a helmet. Since then media coverage on the matter has been generally poor, often confusing the effectiveness of helmets in reducing head injuries following a fall, with the net social benefits of the law itself.

The debate

The debate is about mandatory helmet laws (MHL). The pro-choice side advocates repealing the law so that helmet wearing is voluntary (not compulsory non-helmet wearing as some mistakenly believe).

The argument is about whether the law itself provides net social benefits – not about whether an individual rider involved in a fall is more or less likely to injure their head by wearing a helmet. Evidence points to the fact that yes, a falling rider with a helmet will, on average, suffer less severe head injuries than a bareheaded rider.

But is this a justification for a law?

Not at all. You see wearing a helmet while walking and driving will also prevent head injuries in the case of an accident. But one side of the debate seems happy to leave these other activities alone, even though it fits logically with their argument. 

Health Costs

Indeed, supporters of MHLs often cite taxpayer-funded public health care as a justification. Yet this makes no sense whatsoever for the MHL debate, the tobacco taxes, or any other preventative health care issue.

As I have said before 

…that increasing preventative health care, while having the benefits of a healthier and long life, often come at increased total lifetime health costs, rather than decreased costs as is often proposed. Remember, we all die some day, and any potential cause of death postponed will allow another to take its place, which of course has its own health costs.

Alternatively, a more healthy existence may make us more productive for longer and lead to us contributing more in taxes over our lifetime than the potential increase in health costs which were paid through the tax system for our preventative care.

Governments, and subsequently economists, worry about these things because many health care costs are borne by others though tax revenue, yet the net economic effect is anything but straightforward.

The arguments 

The only argument remaining in favour of MHLs is that we are saving people from themselves. It is a pretty weak argument for making law in my view.

The pro-choice advocates usually cite a variety of factors to demonstrate that any benefits an individual may receive by wearing a helmet can be significantly offset by their own risk compensation and the changes to the behaviour of other road users.

For example

1. Drivers will pass helmeted cyclists closer than bare headed cyclists (with cyclists with long blonde hair getting the most room).
2. Helmets make cyclists feel safer, and they adjust by taking more risks (risk compensation) 
3. Helmet laws decrease the number of cyclists on the road, making car drivers less familiar with cyclist behaviour and making each remaining cyclist less safe.
4. Helmets increase diffuse axonal injuries of the brain and neck due to their increased diameter (and increased the likelihood of impacts due to the larger volume). As Sue Abbott argued in her court case – a helmet can increase angular acceleration which an oblique impulse imparts to the head, increasing the risk of damage to the brain, especially diffuse axonal injury 
5. Helmets can be a hazard in many circumstances (with many child deaths recorded as a result of helmet wearing) 
6. Any deterrent to cycling is likely to increase time spent on sedentary activities, further contributing to the obesity epidemic. 
7. The law allows governments to appear to be acting in the interests of cyclist safety, while neglecting other measures to improve cyclist safety, such as bike lanes or driver education.

Added together, mandatory helmet laws are not a clear winner on any social benefit measure. 

Missing the point

Most media commentary has missed the point of the debate. The pro-choice side does not argue that helmets are worthless for any individual rider if they are to hit their head. They simply claim that helmets are not as effective at reducing injuries as they are made out to be and the many flow-on social effects that further reduce cyclist safety are not considered.

Even academics have a hard time finding strong evidence that helmet laws have reduced head injuries significantly. The Voukelatos and Rissel paper I referenced in a previous post, showed evidence that the benefits of helmet laws in reducing the ratio of head to arm injuries for hospitalized cyclists was insignificant compared to other road safety improvements in the late 1980s and early 1990s. It was later retracted after criticism over data inaccuracies (corrected data in the graph below), with the critics now publishing their own study using similar statistics to examine the effect of the law in NSW. They find that there is a statistically significant impact of the law in reducing the ratio of head to arm and leg injuries.

Unfortunately, their model also found that the helmet law led to fewer hospitalisations of pedestrians with arm injuries.

For cyclists who do fall in a manner leading to significant injuries, a helmet may reduce head injuries. That it is so difficult to see the effect of helmet laws in the data suggests that any benefits of helmet wearing must be very small, even at an individual level. MHL supporters usually feel that helmets prevent almost all head injuries. But this is not the case. They at best provide a marginal improvement in head safety.

I hope this brings a bit of perspective to the issue for readers who stumble across helmet headlines.

Go back to where you came from - Australia's talking

Last night SBS aired their new three part series Go Back To Where You Came From, where six Aussies take part in a 'reverse refugee' experience.

I think most viewers would agree that it was particularly interesting to watch the participant's reactions to meeting refugees and visiting detention centres.  Participants are from quite different backgrounds, and they have a variety of opinions on refugee policy.

The show apparently has twitter all a buzz, and is generating quite a deal of media commentary.  Much of the reaction focuses on the apparent ignorance of one particular participant to the real situation of refugees - especially in light of their strong opinions on the matter.

My wife suggested that there was a clear pattern in the participant's attitudes - those with broad travel experience seem to have more tolerant views.  It was telling that a couple of participants had never left Australia before the show.

What I found missing from the show, which would have been a nice complement to the emotional dimension, is reference to the actual statistics on refugees, their country of origin, the proportion coming by boat, and the changes in refugee numbers over time.

This is important because the public debate usually overlooks a couple of key points.

1. Boat people are a minority of asylum seekers and a tiny fraction of total immigration (graph below from here)

2. The number of asylum seeker arriving in Australia correlates strongly with global numbers, suggesting that it is not so much the policy of the destination country that influences the number of arrivals, but the situation in the country of origin (see the graph below).

For more detailed analysis of the factors involved in refugee outcomes, read this detailed article. I look forward to the follow up episodes tonight and tomorrow, and recommend the program to anyone even slightly interested in the topic.

Concern over the AUD

The Aussie dollar has maintained its above USD parity levels for some time now.  Given Australia's reliance on imported consumer goods, this has raised many concerns.

Now it appears that the actions of foreign central banks might be another factor to consider. The Russian central bank recently bought $4.7billion of AUD.  It seems that our relatively good economic performance is  attracting a fair bit of attention.

There are suggestions that the RBA might want to intervene to take the pressure off the AUD, and indeed their current dealing reflect concern over the high value of the dollar.  Maybe this a partly a factor in their fx dealings, but it doesn't appear to be (see chart below for RBA fx dealings).

The question comes down to whether we choose to buffer our domestic firms from foreign economic upheaval, or are we ‘all in’ in this global economy game?

I think a reasonable middle ground is to support a mining resource tax and a sovereign wealth fund to balance our economy.  I recently suggested that Quarry Australia was not a desirable place to be, and some type of counterbalancing policy would be inherently stabilising.

Whether this would have much of an impact on the AUD I don’t know. But another part of me thinks – stuff it. Go all in. AUD to $1.25+. The non-mining sectors of the economy will get the shake up they really need to improve efficiency and competitiveness in the long term.   You see I wasn't thinking long term.  Maybe short term pain would give productivity the jolt it so desperately needs.

But of course, there are real people's lives to consider as well, and shake-ups like that are painful. 

The other argument to consider is that Australian businesses benefit when foreign markets are booming, so why not let them face the risks when foreign markets are failing?

Given the high probability that any government intervention will be an ineffective mess anyway, maybe we should just let the market function for a while.

There are plenty of questions, but unfortunately no easy answers.   Expect much more debate on this situation in the coming months.

Real estate commission madness

The Queensland government is set to remove the maximum commission that residential real estate agents can charge from the Property Agents and Motor Dealers Regulation 2001. Currently the regulation prescribes in Schedule 1A that

The maximum commission payable on the purchase or sale of residential property is—

(a) if the purchase or sale price is not more than $18000—5% of the price; or

(b) if the purchase or sale price is more than $18000—

(i) $900; and

(ii) 2.5% of 

The common practice since the introduction of the regulation has been for all agents to charge this maximum.

The Deputy Premir Paul Lucas is spinning that dergulation will somehow benefit home sellers. Yeah. Right.

Admittedly, NSW, Vic and the ACT don’t have regulated commissions for real estate agents, and the common practice in these states is to charge 2.5% for homes in urban areas, and between 2.5% and 4% for homes in outer and remote areas. It appears from this comparison that Queensland’s regulation mostly benefits those in outer areas and rural and remote areas - those with the lowest value homes.

The question you must ask, is whether the regulation is disrupting functioning markets such that there is an efficieny gain from removing it? I have yet to hear of a real estate agent refusing a listing because the commission is too low. There are always other agents willing to try their luck.

In fact, recent competition suggests that more agents are negotiating below this maximum. I wrote earlier how lower commissions could be a massive competitive advantage for new agencies.  

Indeed, when the regulation came in home prices across Queensland were less than half of their current levels. So for every sale, an agent now makes double from charging the same commission. If this regulation was a problem we should have felt it years ago, not now.

Poor REIQ Chairman Pamela Bennet reckons “the regulation of commission rates for residential property transactions has not kept pace with the changing market resulting in consumers not receiving the benefits originally intended” What now?

For the maximum to have kept pace with the changing market it should have been reduced over time so that the inflation adjusted average commission was constant – theoretically providing the same benefits as originally intended.

The only logic I can see is that the government thinka this change will stimulate sales and hand them back some stamp duty revenue? Sorry. That's not going to happen.

Population and housing all muddled up (and now corrected)

RBA governor Glenn Stevens needed to say something about house prices in his recent speech. What he said was a little muddled, but if it is meaningful, does not bode well for home prices.  The analysis however got quite a bit of support from one property commentator.

First to the governor’s housing commentary –

It surely is no coincidence that the two state capitals that have had the clearest evidence of declining house prices over the past couple of years – Brisbane and Perth – are the two that previously had the highest rate of population growth and that have since had the biggest decline in population growth. Moreover, it is hard to avoid the conclusion that changes in relative housing costs between states, while certainly not the only factor at work, have played an important role. Relative costs are affected by interstate population flows, but those costs then in turn have a feed-back effect on population flows. This is particularly so for Queensland.

Historically, Queensland has had faster population growth than the southern states, as it has seen a slightly higher natural increase, a rate of net international migration on par with other states and a very substantial net positive flow of interstate migrants. Net interstate migration to Queensland peaked around 2003 – not long after Sydney dwelling prices had reached a new high relative to other cities. Interstate migration at that time was contributing a full percentage point a year to Queensland's population growth. By 2008 this flow had slowed a bit, but international migration had picked up and Queensland's population growth increased, peaking at nearly 3 per cent. Western Australia's population growth was even higher, peaking at almost 3½ per cent.

Meanwhile, at least up to 2007, people were confident and finance was readily available. Brisbane housing prices, which had been a bit over half of the average level of Sydney and Melbourne prices in 2002, had risen to be almost the same by 2008, which was unusually high.

The rate of interstate migration to Queensland then slowed further, to be at its lowest in at least a decade. The effects of that on state population growth were compounded by a decline in international migration, something seen in all states. At the same time, finance became more difficult to obtain and lenders and borrowers alike became more risk averse. This happened everywhere, but its effects in Queensland seem to have been more pronounced. Since then, Brisbane housing prices have been declining relative to those in the southern capitals and the construction sector here has found it tough going.

I decided to check the facts. Below is a graph derived from the ABS Sept 2010 demographic statistics on State populations. The figures show that WA did in fact have a population growth spurt during 2008, but that WA and QLD still retain their claim to the highest population growth rates in the country. In fact, Vic also recorded declines in growth rates of a similar magnitude to QLD in 2009-2010, but home prices have been far better maintained there. 

The only conclusion, to draw, if we believe the RBAs population explanation of home prices, is that with national population growth rates now down the gurgler, home prices nationwide can expect significant falls.

The eurozone is saving Germany

Over at Business Spectator, Oliver Marc Hartwich has laid out the reasons Germany is so keen to maintain the currency union even though Greece is effectively living on German welfare. A low value euro gives German exporters a massive advantage, probably more benefit than the cost of supporting Greece.

I recommend going over to BS and reading in full, but below is the crux of the article (with my emphasis in bold).

These figures explain why German politicians fear nothing more than a break-up of the eurozone. Apart from the inevitable repercussions for the global financial system, any scenario in which weaker eurozone countries departed from monetary union – let alone a scenario in which Germany itself pulled out – would inevitably have an impact on Germany’s exchange rate. It would appreciate substantially and thus undermine its export-dependent economy upon which much of Germany’s recent economic performance is built. No wonder then that German politicians still prefer to pay for Greece, Portugal and other struggling countries, however grudgingly.

Unfortunately, the current German strategy to keep the eurozone together at all costs is extremely short-sighted. It leaves countries like Greece and Portugal permanently dependent on German transfer payments while burdening German taxpayers with enormous liabilities and risks. All of that for the dubious benefit of prolonging and amplifying existing trade imbalances within Europe.

When I pointed out to the advisor that the German government’s policies effectively turned Greece into one big welfare recipient, the answer I got was little more than a ‘Yes, that’s true, but we can still afford it’.

Quarry Australia

Glenn Stevens' address to the Economic Society of Australia in Brisbane yesterday reiterated the RBAs forecast of our future - Quarry Australia. Is that where we want to be?

The speech was full of useful analysis and commentary on domestic and global economic trends, but I have many concerns.

First, I'm not sure why the benefits of the mining boom are not spreading to the States with the largest mining investments. The Queensland government is broke yet still feels the need to stimulate the construction sector to the tune of $10,000 per new home. Further, if the property market is a good indicator of overall economic performance, the resource states seem to be taking a hammering. And by the way, the federal government stimulus is still ongoing, with $2billion still to be spent even in June 2011. So the unstimulated state of the economy is yet to be seen in the data. I didn’t hear a peep about that.

Stevens did raise the issue of falling home prices in Brisbane and Perth, suggesting that the reasons were all down to population growth and risk aversion by households. If we believe his population explanation for home price (which is rubbish anyway), then we have to believe the whole country’s property market is due for a crash, with immigration rates falling rapidly since mid 2008 (see chart below).

Some of his comments on housing follow, but the bolded sentence still confuses me. I could paraphrase - "the bank has no idea why Brisbane and Perth prices are down, but most likely it is because they were too high. We have no idea if prices elsewhere are also too high"

It surely is no coincidence that the two state capitals that have had the clearest evidence of declining house prices over the past couple of years – Brisbane and Perth – are the two that previously had the highest rate of population growth and that have since had the biggest decline in population growth. Moreover, it is hard to avoid the conclusion that changes in relative housing costs between states, while certainly not the only factor at work, have played an important role. Relative costs are affected by interstate population flows, but those costs then in turn have a feed-back effect on population flows. This is particularly so for Queensland.
...
The rate of interstate migration to Queensland then slowed further, to be at its lowest in at least a decade. The effects of that on state population growth were compounded by a decline in international migration, something seen in all states. At the same time, finance became more difficult to obtain and lenders and borrowers alike became more risk averse. This happened everywhere, but its effects in Queensland seem to have been more pronounced. Since then, Brisbane housing prices have been declining relative to those in the southern capitals and the construction sector here has found it tough going.

My other major concern is the following comment which is the justification for placing all of Australia’s bets on mining and energy.

For a long time, the world price of foodstuffs and raw materials tended to decline relative to the prices of manufactures, services and assets. But for some years now the prices of things that are grown, dug up or otherwise extracted have been rising relative to those other prices. This is mainly due to trends in global demand. At any point in time for a particular product we can appeal to supply-side issues – a drought, a flood or a mine or well closure, or some geo political event that is seen as pushing up prices. But stepping back, the main supply problem is really that there has simply been more demand than suppliers were prepared or able to meet at the old prices.

We do not have to look far for the cause: hundreds of millions of people in the emerging world have seen growth in their incomes and associated changes in their living standards, and they want to live much more like we have been living for decades. This means they are moving towards a more energy- and steel-intensive way of life and a more protein-rich diet. That fact is fundamentally changing the shape of the world economy. Even if China's growth rate moderates this year, as it seems to be doing, these structural forces almost certainly will continue.

The graph of Autralia's terms of trade (below) show the pattern of declining raw material prices since WWII, which changed some time in the early 2000s (assuming that our terms of trade is somewhat representative of the relative prices of raw materials and manufactured tradeable goods).

As a general rule, raw materials should become relatively cheaper over time as capital makes us more productive and raw materials easier to extract. This is always true even if there are natural barriers to resource extraction. Changes from this trend caused by a surge in demand are almost by definition temporary.

The generic argument is that China and India are making huge capital investments, thus they need a lot of energy and minerals. These countries are also getting wealthier and consuming more (and meat in particular). But the boom is driven by capital investment – building roads, rail, bridges, dams, buildings etc – which cannot be sustained for long at such a high pace. 

Remember, this a change in relative prices, not quanitites. Prices can fall extremely easily with the smallest of changes to the volumes of minerals and fossil fuels being traded.

The RBA, however, seems to think this price structure will be sustained for some time even though it never has in the past - the natural limit for the terms of trade appears to be around 80.

My main concern is that frighteningly, the RBA, and probably much of the government, sees Australia’s future as a single bet on mining, and is willing to sacrifice much of the remaining economy for this to happen. Unfortunately this is a lose-lose proposition for most of the country.

All other sectors of the economy lose while the mining investment booms. When it crashes, we all lose because there is nothing else left in the economy to absorb capacity in a relatively short period. Remember, the minerals will be in the ground if we don’t mine them now, but the decades of production chains elsewhere in the economy are easily destroyed and slow to rebuild.

I acknowledge that the RBA has a single tool in its toolbox, but surely the message we should be hearing is that a strong and stable economy is a diverse economy. Quarry Australia is a very volatile and risky place to want to be.